Dubai World shocks investors
The news that the state-owned company has asked for a credit standstill badly damages the emirate’s reputation.
Just as Dubai was beginning to recover from the financial shocks of the past year, one of its most important firms is asking creditors for a debt standstill.
Forget the spin that what is being asked for is only a six-month delay by state-owned investment company Dubai World over the repayment of a bond issued by troubled real estate developer, Nakheel. This is DW’s flagship entity within its portfolio. The restructuring shows how dire the emirate’s financial position is – it is a huge blow to its reputation and prestige.
Nakheel has a $3.5 billion Islamic bond due for repayment on December 14. The bond’s performance has been a benchmark in gauging investor sentiment towards the emirate and other state-owned entities, which together have about $50 billion of debt coming due over the next three years.
In February, Nakheel’s bonds were trading as low as 63.5 cents as fears grew that the debt would have to be restructured or might even default. More recently, however, the bonds have traded above par as investors grew confident Dubai was addressing the issues around repayment.
Now that confidence has been destroyed. Some investors may even consider legal action.
Nakheel’s bonds fell more than 20 points to 87 cents immediately after the announcement, while the cost of Dubai’s five-year CDS spread soared over 100 basis points.
Although many people have long warned about Dubai’s excesses, the speed of its fall from grace is still a surprise. Until this request, the emirate could argue that it had not experienced a big credit event despite its financial difficulties, unlike Kuwait, Bahrain or Saudi Arabia.
But what’s puzzling is that on the day that the request was made public, the government announced that separately it had raised $5 billion through two Abu Dhabi banks as part of a $20 billion bond programme. Yet this money – half of what was expected following an initial $10 billion tranche from UAE's central bank earlier in the year – would not be used to help Nakheel repay its debt. It’s unclear where the funds will go; worryingly, it leaves the impression that there must be other, even more urgent needs.
And Dubai’s woes are far from over: its economic growth is anemic, its real estate sector still in crisis and its banks in a rut. The go-getting days of the last decade seem a long way away.
30 November 2009
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